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Pharma adjusts to patent expiries, price cuts and pipeline setbacks...is a mega-merger frenzy returning?
Easter bunnies hunting for the pipeline eggs The Easter weekend of 2014 will be remembered in the pharmaceutical industry as a moment where several years of comparatively conservative M&A came to an abrupt end - even if the largest potential deal that was discussed is still but a rumour. Across the board, reports emerged of potential takeovers and M&A activity - Pfizer and AstraZeneca, GSK and Novartis, Valeant and Allergan.
Clearly, the headlines were about reports on Easter Sunday that Pfizer has made a $100bn+ bid for Anglo-Swedish firm AstraZeneca. In many ways, a merger here would be between two companies who perhaps best symbolise the fall of the old 1990s pharma business model, whereby mass produced medicines were mass marketed to huge patient populations.
The "Lip-Lo" days AstraZeneca was the home of gastrointestinal drug Losec (omeprazole), which became the best-selling blockbuster of all time in the 1990s. Its replacement at the top was Lipitor (atorvastatin), which eventually became Pfizer's core asset before it went off-patent at the end of 2011. AstraZeneca was partially able to offset the impact of Losec's patent expiry by launching a follow-on version of it - Nexium (esomeprazole) - which goes off-patent this year...and its other best-seller is Crestor (rosuvastatin), a drug in the same class as Lipitor.
However, both Pfizer and AstraZeneca have struggled to replace the lost revenues from the good old Losec and Lipitor days through persistent pipeline setbacks. AstraZeneca sought to address issues in its R&D department through its acquisitions of MedImmune and Cambridge Antibody Technology in 2007. Pfizer aggressively pursued acquisitions in the 2000s through a series of mega-mergers with Warner-Lambert, Pharmacia and Wyeth.
A return of mega mergers? The latest acquisition rumour is very much a return to those days, despite the fact that most of the large acquisitions that characterised the pharmaceutical industry in the late 1990s and early 2000s were generally speaking not considered successful - either for shareholders or for R&D productivity. The difference this time is that Pfizer has a strategic opportunity to utilise its extensive cash war chest which currently sits abroad, rather than repatriating it and suffering domestic taxes.
However, AstraZeneca has rejected the initial approach, and at the time of writing it is uncertain whether Pfizer will come back with a new bid - nobody is commenting. A deal that has been signed, in the meantime, is between GSK and Novartis. This is a comparatively unusual "swap of assets", whereby Novartis has acquired GSK's oncology assets, including opt-in rights to GSK's potential future oncology pipeline. In exchange, Novartis has sold off its non-'flu vaccines to GSK. At the same time, the companies have set up an OTC joint venture, whilst Novartis has divested its animal health division to Lilly.
Interestingly, at the end of the multi-faceted deal, the two companies will have much clearer identities: Novartis in its core oncology space, and GSK in the vaccines space. GSK has struggled to establish itself in the oncology space versus its key competitors, and will now refocus in areas of core expertise.
And finally, Valeant Pharmaceuticals slipped an important announcement into an SEC filing on Easter Monday, disclosing its intention to merge with ophthalmology firm Allergan. Companies such as Shire were also dragged into the frenzy, with its stock price soaring upon its potential as an M&A target.
Position of strength? Ultimately, the rumours around the creation of a potential "Pfizenica" brings a lot of the problems that the global pharmaceutical industry faces - patent expirations, R&D setbacks and government price cuts - into focus. However, it also indicates that pharma companies may be feeling more confident about engaging in riskier ventures. Certainly, companies such as Pfizer have been building a significant cash flow over the last few years by avoiding high profile acquisitions, and they now feel more prepared to utilise this cash in an aggressive manner. This is what characterised the industry in its best years, and perhaps this is what we are coming back to - although the road there has been fraught with difficulties.
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